For Private Equity, Raising Yuan Loses Its Shine

Foreign private-equity firms that once rushed to raise funds in yuan, hoping that would give them wider access to Chinese companies to buy, have pulled back.

Around 2007, foreign private-equity firms began raising funds in yuan, also known as renminbi, or RMB, partly because in the absence of clear guidance from the Chinese government, they expected, or hoped, the funds would be treated as domestic. That would put them on the same legal footing as Chinese private-equity firms, with access to a broader base of investors and potential investment targets.

But uncertainty over whether those investment funds are considered by the Chinese government to be domestic or foreign is cutting into yuan fundraising, according to lawyers, bankers and the firms that work on such deals. Factors such as a slowing Chinese economy are reducing activity as well.

“There was a strong interest in RMB fundraising but it has died down somewhat amid uncertainty over whether foreign PE (private-equity) money managers qualify as domestic entities,” says Lawrence Wang, Hong Kong-based managing director at Primavera Capital Group, which manages both dollars and yuan and has invested in Chinese companies such as specialty chemicals company Halogen Ltd.

By 2011, many of the world’s biggest private-equity firms, including Blackstone Group, TPG Inc. and Carlyle Group LP, were raising yuan on the mainland. TPG has formed two funds with a combined fundraising target of 4 billion to 5 billion yuan, while Carlyle Group has raised 3.2 billion yuan for a fund targeting 5 billion yuan. Blackstone has raised 2.8 billion yuan, also for a fund with a target of 5 billion yuan, according to Asia Private Equity Review.

Blackstone, Carlyle and TPG declined to comment.

Expectations of a freer investment environment were bolstered by the 2011 introduction of the Qualified Foreign Limited Partner program, which allowed a yuan-denominated fund that raised more than 95% of its assets in China to invest in Chinese companies on the same legal basis as a Chinese investor.

But last May, China’s National Development Reform Commission, the country’s top economic planner, dashed expectations that the 5% limit on overseas-raised funds would be extended to all yuan investment funds. The commission said that any yuan-denominated fund that included money raised overseas would still be considered a foreign fund, and its investments would require the approval of the Ministry of Commerce.

Private-equity firms are awaiting further details on how money raised locally will be treated.

Amid the uncertainty, some fast-growing Chinese sectors such as media remain out of reach of foreign investors, while others such as education and the Internet remain highly restricted.

Little of the yuan raised on the mainland by foreign private-equity firms has been put to use. They invested just US$71 million worth of yuan in China last year, compared with the US$723 million invested by Chinese private-equity firms, Asia Private Equity Review said.

“Foreign private-equity firms are really scratching their heads on how to stay competitive [against local firms],” says Joseph Chan, a lawyer with Sidley Austin LLP in Shanghai. “Regulatory concern is a very significant factor in decreasing interest for foreign PEs in raising RMB funds.”

The foreign firms’ disappointment has been accompanied by a sharp decline in fundraising. In the first quarter of this year, they raised no yuan funds whatsoever, compared with 9 billion yuan in the first quarter of last year, according to Asia Private Equity Review. After last year’s first quarter, fundraising stopped almost completely; the total for the year was 9.1 billion yuan.

To be sure, private-equity fundraising in China has faced other headwinds, including a slowing economy and declining returns. China’s regulators halted approval of new initial public offerings last year, leaving private-equity firms with fewer ways to profitably exit investments.

That has damped even U.S.-dollar fundraising by foreign firms for investments in China. Last year, the total was $1.4 billion, down from $3.6 billion in 2011.

For now “most of the foreign firms are shying away from China. [They] feel the environment is difficult to operate in and are going back to environments they are familiar with,” said Amir Gal-Or, founder of Israel-based private-equity firm Infinity Group, whose China investments include e-commerce site Baozon.com and high-speed storage start up Memblaze.

Infinity has invested roughly half of the 2 billion yuan it has raised to invest in China.

Corrections & Amplifications: In an earlier version of this post, a chart showing foreign private-equity firms’ investments in China misstated the currency as yuan instead of U.S. dollars.